TML Readership

Not everyone hates the rich. But as the so-called “fiscal cliff” approaches, expressions of distaste for “them” occur frequently enough that the solution seems simple: Tax the rich! But who are the rich?

For some, “the rich” includes anyone making a lot more than they are. “A lot” doesn’t exactly add much precision to the discussion. In Washington, the debate centers on the top 2 percent of income earners.

Part of the impulse to tax the very richest households comes from the belief that “they” can afford it. What’s a few thousand dollars more in taxes to someone making millions a year? But another part comes from the belief that the rich are not paying their “fair share.” And that’s what I would like to address. What might be behind the deeply felt suspicion that the rich got that way unfairly?

First, who is the 1 percent? It’s easy enough to find that the average household income of the top 1 percent of income earners in the United States in 2008 was $1.2 million. But to break into the top 1 percent today you need much less: about $380,000. (The top 2 percent begins at around $200,000.) So everyone from a moderately successful lawyer (or two not-so-successful lawyers living under one roof) to Bill Gates is considered one of “the rich.”

Second, how much income does the 1 percent make, and what do they pay in taxes? According to The Christian Science Monitor, in recent years the top 1 percent earned about 20.3 percent of all income in the United States and paid about 21.5 percent of all state and federal income taxes. They also pay about 30 percent of their income in taxes.

So the numbers indicate that the top 1 percent annually pay a little more of the combined federal and state taxes than they make in income. The kerfuffle in Washington these days is about federal income tax alone. Well, the National Taxpayers Union tells us that the top 1 percent paid 36.7 percent of all federal income taxes in 2009.

I’ve never heard anyone who’s been calling for higher taxes on the rich say exactly how much more than 36.7 percent of all federal income tax those who are earning 20.3 percent of the income should be paying. To many, the answer is simple: more!

The key to all this is the concept of “earning” income. What does it mean to “earn”?

There are only two ways to acquire great wealth: trade or plunder. Private property and markets did not flourish over most of human experience, and so for the most part people got very rich by taking from others by using or threatening physical violence. Under such circumstances—which again dominated our history—it was natural and reasonable to suspect the rich of wrongdoing. They had privileges denied to everyone else.

Privilege is a loaded term, of course. Some speak of privilege whenever one person simply has more than another. I use the term in the sense of Frédéric Bastiat, as a favor granted by the government to a select few at the expense of others. A free market is a market free of privilege.

Legal privilege has never completely disappeared even in the freest markets. But where it has been constrained the most, gradually throughout much of the world over the past 200 years or so, markets and trade have indeed flourished, to the benefit of all—especially the least well-off in society. People became rich and super-rich in unimagined numbers through trade rather than plunder. Plunder, after all, at best redistributes wealth; it never creates it. The rich earned their wealth.

The economic historian Deirdre McCloskey argues that when the merchant class were granted dignity and respect, material well-being started an upward climb (beginning about the year 1800) that we experience to this day. But ancient habits of thought are hard to shake.

In the past 60 or 70 years legal privilege has again intruded into relatively free markets with a vengeance. In the form of “special interests” and “rent seeking” it has thrived in the presence of so much wealth to be plundered by protectionism, subsidies, and taxation. What we today call “crony capitalism” reinforces popular suspicion against great wealth.

In the crony-capitalist system we live in it may not be altogether wrong, from a libertarian view, to be suspicious (though not envious) of the rich and of how they got that way. Great wealth made by Wall Street bankers, agri-businesses, the healthcare industry, defense contractors, Fannie Mae and Freddie Mac executives, sports franchises, billionaire developers—all partnering in some way with political power—mix trade and plunder together in ways that may be impossible to untangle.

Crony capitalism, and the “monstrous hybrids” it creates, makes criticizing simplistic calls for taxing the rich much more of a challenge. How much of the income of the 1 percent is earned from trade and how much comes from plunder? As government intervention grows it will get harder and harder to say.